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Copyright © 2004 South-Western 6 The Federal Reserve
Copyright © 2004 South-Western THE FEDERAL RESERVE SYSTEM The Federal Reserve (Fed) serves as the nation’s central bank. It is designed to oversee the banking system. It regulates the quantity of money in the economy.
Copyright © 2004 South-Western THE FEDERAL RESERVE SYSTEM The Fed was created in 1914 after a series of bank failures convinced Congress that the United States needed a central bank to ensure the health of the nation’s banking system.
Copyright © 2004 South-Western THE FEDERAL RESERVE SYSTEM The Structure of the Federal Reserve System: The primary elements in the Federal Reserve System are: 1) The Board of Governors 2) The Regional Federal Reserve Banks 3) The Federal Open Market Committee
Copyright © 2004 South-Western The Fed’s Organization The Fed is run by a Board of Governors, which has seven members appointed by the president and confirmed by the Senate. Among the seven members, the most important is the chairman. The chairman directs the Fed staff, presides over board meetings, and testifies about Fed policy in front of Congressional Committees.
Copyright © 2004 South-Western The Fed’s Organization The Board of Governors Seven members Appointed by the president Confirmed by the Senate Serve staggered 14-year terms so that one comes vacant every two years. President appoints a member as chairman to serve a four-year term.
Copyright © 2004 South-Western The Fed’s Organization The Federal Reserve System is made up of the Federal Reserve Board in Washington, D.C., and twelve regional Federal Reserve Banks.
Copyright © 2004 South-Western The Fed’s Organization The Federal Reserve Banks Twelve district banks Nine directors Three appointed by the Board of Governors. Six are elected by the commercial banks in the district. The directors appoint the district president, which is approved by the Board of Governors.
The Federal Reserve System Copyright©2003 Southwestern/Thomson Learning
Copyright © 2004 South-Western The Federal Open Market Committee Three Primary Functions of the Fed Regulates banks to ensure they follow federal laws intended to promote safe and sound banking practices. Acts as a banker’s bank, making loans to banks and as a lender of last resort. Conducts monetary policy by controlling the money supply.
Copyright © 2004 South-Western The Federal Open Market Committee Open-Market Operations The money supply is the quantity of money available in the economy. The primary way in which the Fed changes the money supply is through open-market operations. The Fed purchases and sells U.S. government bonds.
Copyright © 2004 South-Western The Federal Open Market Committee Open-Market Operations To increase the money supply, the Fed buys government bonds from the public. To decrease the money supply, the Fed sells government bonds to the public.
Copyright © 2004 South-Western BANKS AND THE MONEY SUPPLY Banks can influence the quantity of demand deposits in the economy and the money supply.
Copyright © 2004 South-Western The Fed’s Tools of Monetary Control Changing the Discount Rate The discount rate is the interest rate the Fed charges banks for loans. Increasing the discount rate decreases the money supply. Decreasing the discount rate increases the money supply.
Copyright © 2004 South-Western Summary The Federal Reserve, the central bank of the United States, regulates the U.S. monetary system. It controls the money supply through open- market operations or by changing reserve requirements or the discount rate.
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